Asked by Raney Sumpter on Jun 09, 2024
Verified
What is the closing entry to allocate net income $210,000 to Eric, Von, and Derek? Their respective capital balances are $69,000, $69,000, and $92,000. Net income is shared in a ratio of their capital balances.
A) Debit Income Summary $210,000; credit Eric, Capital $63,000; credit Von, Capital $63,000; credit Derek, Capital $84,000
B) Debit Income Summary $210,000; credit Eric, Capital $70,000; credit Von, Capital $70,000; credit Derek, Capital $70,000
C) Debit Salary Expense $210,000; credit Salaries Payable $210,000
D) Net income cannot be allocated.
Closing Entry
Journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts.
Capital Balances
The amount of owners' equity or shareholders' equity in a business, reflecting the residual assets after deducting liabilities.
- Grasp the concept of employing closing entries to appropriately allocate net income among partners, following agreed-upon ratios or capital balances.
Verified Answer
BB
Brisa BuenrostroJun 10, 2024
Final Answer :
A
Explanation :
The net income of $210,000 is allocated based on the ratio of their capital balances. The total capital is $69,000 + $69,000 + $92,000 = $230,000. Eric and Von each have $69,000/$230,000 of the capital, and Derek has $92,000/$230,000. Therefore, the income allocation is $210,000 * ($69,000/$230,000) for Eric and Von, and $210,000 * ($92,000/$230,000) for Derek, which results in $63,000 for Eric, $63,000 for Von, and $84,000 for Derek.
Learning Objectives
- Grasp the concept of employing closing entries to appropriately allocate net income among partners, following agreed-upon ratios or capital balances.